Bond market takes an auspicious role in the financial market. The current widening gap between the US and Eurozone bond yields is one reason why the Euro slides

Bond market takes an auspicious role in the financial market. Bond stands alongside stocks as one of the financial market most important asset. Therefore, it is logically become one of the many factors that determines the trend.  The current widening gap between the US and Eurozone bond yields is one reason why the Euro slides.

 

Wider Yields Gap

For two days in a row now, Euro have slid approaching lowest level since February. Reuters reported that at the beginning of the year, investors that wanted higher returns than US and German near-zero rates have seek Eurozone peripheral bonds' higher premium. Consequently, it contributed to Euro strength. However, Eurozone bonds currently decreases at the time when US Treasury bond yields went up. Spread between 2-year US Treasury yields and its German counterpart widened to almost 37 basis points in Tuesday, the highest since 2007. Add to that the 10-year US Treasury bond yields rose to almost a month high. Widened rate spread is to be blamed as one of the reasons why Euro started to drop drastically beside of ECB rate cut last week.

The boost behind US bond yields is on speculation that the Fed rate hike is probably will come sooner than expected. Meanwhile, Eurozone faces the possibility of longer record low rate, with German Chancellor Angela Merkel mentioned that ECB decision is indicative of an unresolved European financial crisis.

Danskebank newsletters explained that US further increase in the OECD leading indicator indicates a re-acceleration after a weak start to the year. As US job market is getting closer to pass unemployment treshold, speculation on Fed rate hike will heat up again. Danskebank analysts expect the Fed to revise unemployment projection lower in next week meeting, then raise bechmark rate in June 2015 and gradually increase it to 1% by the end of 2015 and 2.25% by the end of 2016. Along with the more heated talks about Fed rate hike, further decline on EURUSD could be expected, particularly when the ECB widen monetary policy gap by injecting liquidity to the economy.

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Bond Yields On Forex Talks

Bond commonly issued by either a government or a corporation as notes bearing the promise of initial investment return plus interest. According to what kind of bond it is, the interest could be paid at the end of bond maturity, once a year, twice a year, or else. An investor could buy bond individually or through third party such as hedge fund and keep it until maturity or sell it in the secondary market.

Bond yields refer to how much return an investor will receive when he invests in a bond. Nominal yield is calculated by dividing the bond's interest with the bond's nominal value, while current value is counted by dividing the amount of interest it offers with current market price of the bond.

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Government-issued bond yields fluctuated along with economic condition. The country's economy determines government's ability to pay the bonds, as well as the ongoing benchmark interest rates that might influence the bond rates. When economic condition is less conducive, investor will move to safer investment, makes bond yields slides. On the other hand, when economic condition recovers, signalled by decreasing unemployment and higher economic growth, bond yields shall race upward.

Consequently, the higher bond yields, the more people seek it, which means more people needs the country's currency. Therefore high bond yields will lead to higher exchange rate, while lower bond yields will increase bearish pressures on the currency.

 

Eurozone vs US Bond Yields Case

It is commonly understood that although US fundamental economy nowadays has not recovered enough, but it is relatively better than the Eurozone and Japan. Additionally, apart from New Zealand and the UK, the United States of America is where interest rate hike could be expected. In comparison, Eurozone and Japan record low benchmark interest rate seem so puny.

The gap is being brought down hard in the bond market. US bond yields has the bright prospect of higher rates, while the Eurozone ones could possibly drop further. Investors race to buy US bonds, leaving Eurozone bonds in the dust.

This does not necessarily mean that US economy is already in a good condition. Unemployment stats is still showing inconsistencies, wages stagnant, and GDP growth stalled. Many people too, still favor the ultimate safe haven, Gold, as proven by Gold limited gain in the commodities market this morning. Nevertheless, it is clear that as long as gaps between the two region's bond yields remain high, Euro is in substantial disadvantage. Issuance of new sovereign bonds from the Eurozone might help, but don't wish for much, because the area's prospect might seem unattractive for many investors.